Wednesday, 24 April 2013

Chechnya and Russian Federal Center Clash Over Subsidies

Published in Analytical Articles

by Tomáš Šmíd (04/17/2013 issue of the CACI Analyst)

The Accounts Chamber of the Russian Federation recently issued a press release with information on the budget implementation audit of the Chechen Republic. The audit has revealed errors and violations amounting to 7.9 billion rubles (ca. US$ 252 million). While it has not yet been stated whether the violations will be classified as crimes, the Chechen leadership will have to explain how they handle the federal budget funds. To make things more complicated, the question emerges at a time when debates at the federal level increasingly question whether federal subsidies for Chechnya should be retained.


BACKGROUND: Financial relations between the federal center and the Chechen Republic are a frequent topic of discussion in Russia. Like most North Caucasian republics, Chechnya belongs to the so called “subsidy regions,” whose financial support from the center is disputed by a majority of Russians. This is an effect both of the prevalent Caucasophobia in Russian society, which would rather see these resources spent in ethnically Russian regions, and of the fact that federal subsidies to republics like Chechnya are often spent without transparency, and reasonable suspicion exists that a large proportion of the subsidies are simply stolen. The Accounts Chamber’s last audit supports these suspicions as it found transgressions amounting to 7.9 billion rubles in Chechnya’s budget for the year 2012. While similar problems have regularly been noted in the last few years, this audit coincided with debates on the federal level on the prospect of exempting Chechnya from federal funding and letting the region become self-sufficient. Such suggestions are definitely not received positively by the Chechen leadership under Ramzan Kadyrov.

Since the Chechen political regime is strongly vertical with a crucial role of the head of the republic, responsibility for the management of budgetary funds lies fully with Kadyrov and his immediate associates. This distinguishes Chechnya from the neighboring “subsidy republics” – Dagestan and Ingushetia – where power is much more fragmented and several stakeholders compete for appropriations.

Kadyrov has managed to establish a semblance of stability and development in Chechnya, but closer examination reveals that many projects are ineffectively financed and often carry the features of so-called Potemkin villages. Numerous hotels and a football stadium were built in Grozny, and a high-quality road was constructed from Grozny to Gudermes. Yet, the city still lacks many basic elements of social infrastructure such as kindergartens, schools and quality health care facilities.

The transport and industrial infrastructure is also not developing as expected. The Accounts Chamber audit argues that Chechnya has insufficiently fulfilled the Development strategy of the North Caucasian federal district until the year 2025, and failed to adopt solutions for the renewed rail link between Grozny and Nazran and the construction of a Grozny oil processing plant as examples of the shortcomings. Moreover, a number of projects in education, culture and health care have not been completed. Yet, problems are also related to the cut in finances of the federal target program of socio-economic development of the Chechen Republic by about 12 billion rubles.

The Chechen leadership will also have to explain the lack of implementation of the program on combating corruption in the Chechen Republic in the years 2011 - 2013, which the audit also revealed. Chechnya, along with the entire North Caucasus Federal District, is Russia’s leading region in terms of corruption and money laundering. The problem is connected to the fact that the region lacks a sufficiently developed banking system and a series of transactions are operated through the shadow economy. The same can be said about the entire financial system, which is one of the main reasons why a large amount of budgetary resources are either stolen or inefficiently used.

IMPLICATIONS: Transforming Chechnya into a common budgetary regime instead of a subsidy republic could cause a number of complications. Firstly, Chechnya does not represent a unique case in the Russian context, as it belongs to the top twenty subsidy recipient regions – both in absolute and per capita numbers. Nevertheless, Chechnya does not receive revenues from the raw materials located on its territory, which consists mainly of high-quality oil. The extraction and transport of oil is more or less controlled by the Russian state company Rosneft, which is now headed by former Deputy Prime Minister Igor Sechin.

In this context, Kadyrov has long sought to obtain revenues by placing the export of Chechen crude oil under the control of the Chechen Republic, i.e. under Kadyrov himself. These efforts began already during the rule of his father Akhmat, who publicly stated in spring 2004 that he demanded serious talks with President Putin about Chechnya’s oil. In the end, negotiations were precluded by Akhmat Kadyrov’s assassination.

Kadyrov has even raised the specter of involving Azerbaijan in the issue and the possible construction of new refineries by Azerbaijani investors.

However, even in the case that Chechnya would manage to obtain control of the revenues from oil exports, the Chechen leadership still fears losing its federal budgetary funding. In fact, Kadyrov’s government seeks to increase the subsidies, simply because it needs the money and has grown accustomed to this mode of economic planning. In addition, the ruling elite as well as ordinary Chechens perceive the subsidies as a kind of tax that the federal center pays for the complete devastation of Chechnya during two brutal wars.

Kadyrov has counted on the federal contribution to such an extent that according to some Chechen observers, he has not hesitated to take loans in Chechen banks with future subsidies as a guarantee. In order to curb embezzlement, subsidies are normally paid by the end of the year and are calculated in relation to projects that were actually implemented. Consequently, the loans have constituted a means for Kadyrov’s leadership to evade federal control.

Kadyrov has failed to build a profitable industrial base. The construction boom is slowly ebbing out, and has in any case not decreased the unemployment significantly as locals have rarely been employed by foreign companies. Consequently, the Chechen leadership suggests that federal funding should pay also for the construction of industrial and commercial buildings.

It is obvious that the visions of the Chechen leadership and the federal center are in conflict and that the level of distrust is increasing. The head of the North Caucasian federal district, Alexander Khloponin, does not hide his dissatisfaction and has already declared on several occasions that the federal district is the most problematic Russian region in terms of money laundering, which often happens through investment projects in Chechnya. He has also pointed out that in ten years; the center has not managed to cut financial support for the “boyeviks,” a comment clearly aimed at Kadyrov, whom Moscow supports mainly because of his role as a guarantor of Chechen stability and an ally against the so called illegal armed formations.

CONCLUSIONS: The question of financing the Chechen Republic and handling the federal budgetary resources is a complicated issue to resolve. While Chechnya is a subsidized region it does not represent any exception in the North Caucasus region, and receives proportionally less subsidies than Dagestan and Ingushetia. Chechnya does not receive any revenues from its natural resources. While it has a share of the business controlled by the Russian state company Rosneft, it has no control over the oil wealth. As The Accounts Chamber of the Russian Federation has revealed, Chechnya does not manage the budgetary resources transparently and responsibly and it is also probable that the audit has not disclosed all the controversies.

Chechnya will likely continue to be funded primarily from the federal budget as it would otherwise not be able to function and the situation in Chechnya could dramatically destabilize. The Kadyrov leadership’s reaction would be highly unpredictable in such a situation. The Chechen leadership is economically dependent on the federal center; but in a historical perspective, it is politically unprecedentedly sovereign. The more successful Kadyrov will be in bolstering the illusion of stability and his effectiveness in the struggle against the illegal armed formations, the less probable it is that any significant changes in the mode Chechnya is financed will appear, regardless of the Accounts Chamber’s audits.

AUTHOR’S BIO: Tomáš Šmíd is Assistant Professor at Masaryk University in Brno, Czech Republic. He was a Fulbright Fellow at the Central Asia-Caucasus Institute in 2010/2011.

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